The Gilmo Report

September 26, 2010

September 26, 2010

The most striking thing about the current market rally is that it is inversely correlating to the breakdown in the U.S. Dollar. When the dollar began its sharp move to the downside in late August, the market took its cue by rallying sharply off its late August lows. In the comparison line chart below, the NASDAQ Composite Index is shown against the U.S. Dollar Index (green line), where the inverse correlation is relatively easy to see.

NASDAQ Composite Index Gilmo Report Chart

The breakdown in the US Dollar has taken it through the 80 support level while it has moved to new lows, as we see in the next chart, the daily chart of the U.S. Dollar Index. As you can see, the trajectory of the dollar to the downside since the second week of September has been rather steep, and brings up the question as to whether we are about to see a collapse of the dollar as many have been predicting. The flip side of this is whether the obvious breach of support here sets up an “undercut & rally” type of fake-out that causes the dollar to bounce. This is the potentiality that I am watching for, actually, as this could trigger a pullback, even a sharp one, in the stock market as well as commodities, all of which have been rallying sharply throughout the “scary’ month of September as the dollar has fallen. It seems likely that “QE2,” the latest phase of Fed money-printing, is a driver of this current market rally, and the “re-inflation play” is on.

US Dollar Gilmo Report Chart

Some of the furious moves in large-cap growth stocks like Apple, Inc. (AAPL), Amazon.com (AMZN), and even Google, Inc. (GOOG), shown below on a daily chart, appear to be driven by money that needs to get into this market in a hurry. Note that GOOG flashed a rare 200-day moving average pocket pivot buy point on Friday.

Google, Inc. (GOOG) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission.

Last weekend I continued to point out the possibility of a pullback in the market, something that I felt was even necessary in order for the market to properly consolidate the sharp gains off the late-August lows that have resulted in a nearly straight-up move by the NASDAQ Composite Index, as we see on its daily chart below. The middle three days of this past week gave us a three-day pullback that took the NASDAQ down to its 10-day moving average, but no further, before the market snapped right back on a big gap-up move to the upside on Friday. Knowing the market was in need of a pullback set up some opportunistic buying opportunities as some leading stocks pulled back and then set up to move higher on Friday. With most stocks extended here, it is nearly impossible to find much among the “big stock” leadership that is at a logical or low-risk buy point. However, speaking at least for myself, I’m feeling somewhat fat and happy right now, so there is no problem with letting stocks do what they are going to do, and in cases where a position is up 20% or more in four weeks or longer, there is generally not a problem in taking at least some profits. Most leading stocks, once they are up 20-25%, will often base, if only for 3-4 weeks, and the most efficient way to re-enter leaders you might have taken some profits on is through the judicious use of pocket pivot buy points.

NASDAQ Composite Index Gilmo Report Chart

The best secondary buy point I saw in a leading stock on Friday came in Chipotle Mexican Grill (CMG), which I have previously discussed in my August 1st, August 29th, and September 1st reports where I covered all three previous buy points in the pattern so far. On Friday, CMG popped up through its 10-day moving average, as we see on the daily chart below, on volume which constitutes a valid pocket pivot volume signature, hence is a pocket pivot buy point. If you are already long CMG, the stock is giving you another add point. Aggressive players can try and take an initial position here with the idea that the stock should hold the 10-day moving average, roughly. Three days ago on the chart, CMG closed below the 10-day line and then the next day it dipped below the intra-day low of that first day under the 10-day line for a moving average violation. CMG does not show a tendency to “obey” its 10-day moving average, hence using it as a guide for selling any part of your position bought at any of the prior three buy points in the stock, all of which are much lower than where the stock is now, is not advisable. In this case CMG found support at the 20-day moving average, a reasonable support level for stocks that do not obey their 10-day moving average. It is interesting to note that on a fundamental basis CMG is showing accelerating sales growth but decelerating earnings growth, however so far the action of the stock doesn’t consider this a problem.

Chipotle Mexican Grill (CMG), Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission.

Another vehicle that has kept flashing buy signals as it moves up along its 10-day moving average is the iShares Silver Trust (SLV), shown below on a daily chart. As I’ve discussed in two of my three last reports, as well as in my appearance on Fox Business News this past Thursday, what silver has going for it is a) a breakout to 30-year highs, and b) the potential to play catch-up to gold which has far exceeded its early 1980 price high of $873-an-ounce while silver is still far below its 1980 high of $41.50 per ounce. Hilariously enough, when I was on Fox the other day I went into some sort of “brain freeze” where I recalled the high in silver as being “46.50 in early 1981,” which is entirely wrong! I suppose that’s what happens when you are sitting in front of a small supernova of camera lights and it causes your synapses to start misfiring. I’ve looked at the long-term charts of silver and gold repeatedly in this report, and where I pulled that price and year from I will never know! C’est la vie. In any case, SLV has held its 10-week moving average very well now for over 4 weeks as it trends very strongly to thirty-year highs. The urgency with which money has moved into precious metals is clearly evident on the charts as investors seek to capitalize on a sharply falling dollar.

iShares Silver Trust (SLV), Gilmo Report Chart

My general take on the precious metals “complex” – the stocks and the metals themselves – is that certainly if the dollar goes lower then they will likely continue higher. However, as I pointed out above, the crowd likely sees the dollar’s recent breach of support at the 80 level as an ominous sign, setting up this “undercut & rally” type of head fake that could occur here to fool the crowd, and in turn causing a pullback in the metals and the stocks. If we look at Randgold Resources (GOLD) on a daily candlestick chart with all the moving averages except the 10-day removed, we can see that it is somewhat extended from the 10-day, even as it continues to flash pocket pivot volume signatures. Given that each volume signature occurs when the stock is somewhat extended from the 10-day moving average, it is tricky to buy them. I had some GOLD but sold it into Friday’s move, looking for a pullback to the 10-day moving average as a possible re-entry point. I could be wrong, and the stock could rocket higher from here, however. Nevertheless, the odds may favor a pullback or a pause here as the 10-day line catches up to the stock price.

Randgold Resources (GOLD) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission.

Gold stocks are sometimes difficult stock market animals to figure out. Newmont Mining Corp. (NEM) sells at 17 times forward earnings estimates, while GOLD sells at 55 times forward earnings estimates, yet GOLD is a $100 stock while NEM languishes in the mid-60’s. NEM is also what I consider to be the institutional “go to guy” when they want to be weighted in the precious metals sector. As the daily candlestick chart below shows, the earnings growth being generated by NEM is certainly “beefy” with some big quarterly dollar-and-cent numbers in there. The difference might be that GOLD has some stronger estimates over the next two quarters, as well as the fact that GOLD has only 82 million shares floating, while NEM has 483 million. Supply/demand says that for any given change in demand for GOLD shares relative to the same change for NEM shares there is by definition fewer shares to meet demand – hence price is more easily driven higher. That might be one explanation, but in any case this low-volume pullback to the pocket pivot buy point of four days ago is potentially buyable.

Newmont Mining Corp. (NEM) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission

We might compare today’s GOLD/NEM situation to American Barrick (ABX) 1986 and NEM back in 1986-1987, when gold stocks had a big streak to the upside. Back then ABX was the upstart, having come public with their initial public offering of May 1983 on the Toronto Stock Exchange. In 1985 ABX listed on the NYSE, and by 1986 was setting up for a big upside run that would take the stock up seven-fold from its initial breakout in early April, as you can see in its weekly chart from 1987, below. I should point out that Yahoo! Finance has very nice interactive charts that allow you to go back in history to view charts going back for several decades, and that is where I was able to find historical charts of ABX and NEM from 1987. Here you can see ABX forming a cup-with-hande from which it breaks out in April of 1986. I note the middle of the base where a big pocket pivot buy point showed up on the daily chart.

American Barrick (ABX) 1986 Gilmo Report Chart

And in fact if we pull up a daily chart from 1985-1986 showing the cup-with-hande base that American Barrick (ABX) 1985 formed back then before it broke out and launched on its seven-fold run in the late 1980’s, we can see that in fact there were a plethora of pocket pivot buy points within this cup-with-hande base. Most of these occurred as it came up the right side of the cup and then a number of pocket pivots flashed in the handle before the stock broke out.

American Barrick (ABX) 1985 Gilmo Report Chart


Newmont Mining Corp. (NEM) 1987 had an interesting move after first doubling in a move from December 1986 to April 1987. It then based for the next 3 months, roughly, before breaking out of a cup-like formation and going on a romp to new highs. This action in NEM of 1987 reminds me a little bit of GOLD in 2010.

Newmont Mining Corp. (NEM) 1987 Gilmo Report Chart

The precious metals stocks are clearly interesting, although I admit that I sense that I have been conditioned to not believe gold stocks can have a big price run. If precious metals stocks often seem flakey, then perhaps mining companies that mine all kinds of hard assets, e.g., things like iron ore, copper, coal, bauxite, aluminum, potassium, manganese, ferro-alloys, cobalt, precious metals, etc., such as Brazilian enterprise Vale S.A. (VALE) will be somewhat less flakey. VALE (pronounced “vah-leh”) does all of this, as well as getting into things like energy and steel-making, and as the company’s website says, they “transform mineral resources into prosperity and sustainable development.” That works for me. What works even better are the four pocket pivot buy points the stock has logged in the past four days – three coming up through the 200-day line and one on a breakout through the 29.41 of this little consolidation it has been in since early August. Earnings and sales are turning very strongly, and VALE has some huge estimates over the next two quarters. Some might say this is a low-handle breakout, but I would pay attention to the pocket pivot buy signals first – just look at Amazon.com as it emerged through the 130 price level on a big pocket pivot – the handle in the cup-with-hande was “low” and hence “faulty,” Pay attention to pockets first and forget about “flawed” bases – consider buying it here using the 200-dma as your selling guide.

Vale S.A. (VALE) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission.

Altera Corp. (ALTR), which I last discussed in my reports of September 15th and 19th, still continues to act in very squirrely fashion as it zigs and zags its way to higher highs, as we can see in its daily chart below. When a stock literally zips around like a pinball, bouncing off of resistance and moving average support with sharp moves in either direction, all while volume is at times heavy in either directions, it’s just plain hard to sit with it. ALTR started out this past week with a scary break towards its 50-day moving average on very heavy volume, and then on Thursday stabilized at the line before gapping back up and cruising to higher highs on Friday. Semiconductor stocks can be a little bit like this, so it’s generally better to try and buy ALTR on weakness when it pulls into a logical area of support. As ALTR moves to new highs, however, I would look for the stock to show some signs of becoming more coherent in its price/volume action. In any case, this bizarre action over the past week is also what I would call a “shakeout and breakout” that may have served to flush out the last weak hands in ALTR, at least for now, and hence sets up a move up into the 30’s. The one thing ALTR has going for it on this breakout is that it is also a pocket pivot, since volume on Friday’s up day exceeded the volume on Wednesday’s big down day, hence this is buyable using the 10-day line at around 28 as a downside selling guide.

Altera Corp. (ALTR), Gilmo Report Chart

I first picked up Trina Solar Ltd. (TSL) in my report of August 29th when the stock was breaking out from a cup-with-hande type of set-up at around the 25 price level. Now TSL is forming this much larger base structure extending back to mid-January of this year. You might think of it as a big cup-with-hande with the stock now forming what is so far a three-week handle as it goes four-weeks-tight (4WT) here. This is very constructive action, in my view, as TSL did pick up some volume and closed in the upper part of its weekly range for a nice supporting week that held well above the 10-week (50-day) moving average. I would look for some sort of pocket pivot move to occur here as the stock rests on top of its 10-day moving average, which you cannot see here. One caveat about TSL is that despite strong triple-digit and double-digit earnings growth in the past three quarters, the stock still sells at 10 times estimates. I look at P/E ratios as a measure of the market’s demand for a particular company’s earnings stream, and for some reason the market doesn’t value TSL’s earnings stream at a very high multiple. I would focus on the price/volume action first, of course, but this low P/E is actually a little troublesome to me.

Trina Solar Ltd. (TSL) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2010, used by permission

Nearly all of my favorite long ideas are extended, and for discussions on these, including the “hot” cloud-computing stocks, members can rely on the “cloud” of Gilmo Reports over the past month, since mid-August, to gain an understanding of how to handle these currently.

So far it appears that QE2, or at least the possibility of more massive quantitative easing from the Fed, also known as money-printing or “Fed Fumes,” is what is driving the market higher. As well, we have the potential for some sort of inflection point in the political make-up of the U.S. government in the coming November elections, whereupon a more pro-business set of policies might be forthcoming, as well as the likelihood that the so-called Bush Tax Cuts will be extended, given the fact that politicians, including Democrats, need something to hang their hat on when they appeal to the hoi polloi for their votes in November. As news comes in on either side of any of these developments, the market may pause as it sees a shadow of uncertainty show up here and there, followed by intermittent glimmers of hope. This could lead to some sort of consolidating action here. I believe it would be very constructive to see leading stocks base a little bit here as we move into the November election phase, creating a little more fear as the market perhaps pulls back and consolidates a bit further. The way the market sold down for three days and then gapped right back up to new highs looks a bit funny to me, but in these days of QE, you can expect the market to engage in such antics. I would even go so far as to say it has, to a large extent, become its character as movement in one direction is often immediately canceled by a gap-up or gap-down move the very next day. In any case, I would tend to see the market as being in need of some consolidation here which will serve to set up further upside from here, although that doesn’t have to happen – the market could just keep on streaking higher.

In the meantime, it is best to focus on your stocks. If you have some decent profits in stocks that have taken four weeks or more to make those gains, there is nothing wrong with taking some of those profits. This is what I will generally tend to do and then sit with a fair bit of dry powder as I look around for the next pocket pivot or gap-up buy point to jump on, such as the nice move in Netflix (NFLX) earlier this week. I would continue to look at pullbacks in the market as well as in leading stocks as buying opportunities, hence once must remain in an opportunistic mode here until this rally fails, focusing less on the market as a “stock market” and more as a “market of stocks,” as I’ve continually referred to my approach over the past couple of months. This helps to keep your psychology relatively even, without creating any internal bias in your head that needs to label itself “bullish” or “bearish” during what has really been a choppy market environment. This sharp rally off the late August lows might be the start of something big, or it might just be one big upside chop in what has been a very choppy and sloppy environment since May. But these short-term trends are profitable, as I discovered in May on the short side, and am now seeing on the long side in September. We will just have to let the market decide how much it is going to give us. I am keying on the U.S. Dollar right now, however, as I believe the potential for an “undercut & rally” head fake as I discussed at the outset of this report could cause a pullback in the market. The positions of the indexes and the Dollar are logical for something like this to occur, so I believe it is helpful to at least be mindful of this in order to keep from getting too top-heavy in your positions.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC

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